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High inflation could cause S&P 500 crash, USD flight to quality

Inflation concerns rise with Jan's CPI at 3.1%, signaling distance from Fed's target. Energy sector deflation contrasts with natural gas uptick. S&P 500 dips below $5000, while USD strengthens amid economic uncertainty.
Source: Bloomberg
Picture of Frank Kaberna
Frank Kaberna
Director of Strategy, Chicago

Data current as of 2/21/2024

Key points

  • CPI inflation sticky above 2%: (0:30)
  • Energy costs not the culprit: (2:14)
  • Natural gas picking up off lows: (4:05)
  • US stocks beginning to turn: (5:13)
  • US dollar trending higher: (6:32)

Impact of Inflation on Financial Markets

High inflation rates and their potential ramifications on the financial markets, particularly the S&P 500, are capturing the attention of investors worldwide. With January's inflation numbers exceeding the Federal Reserve's target, understanding the implications becomes crucial for navigating the complexities of the current economic environment.

Persistent Inflation Concerns

January's Consumer Price Index (CPI) inflation reading at 3.1% stands as a stark indicator that the US is still a distance away from reaching the Federal Reserve's 2% inflation target. This prolonged inflationary pressure raises concerns about the economic stability and the potential for a significant correction in the S&P 500. Contrary to popular belief, recent data suggests that energy costs, often a significant driver of inflation, are not currently contributing to these heightened levels, as evidenced by the sector's deflationary trend.

Energy Sector Dynamics

Despite the overall deflationary mode of the energy sector, there is still a scenario in which commodities like natural gas prevent inflation from lowering further. Natural gas prices have recently hit historic lows, and midweek made a notable reversion higher. With historical precedent for much higher gas prices, the energy sector could rebound and impact inflation to the upside - even if the sector is not currently pulling inflation higher.

Market Reactions

The S&P 500's recent performance, retreating below the $5000 mark after achieving several all-time highs, signals growing investor apprehension amid high inflation. Concurrently, the US dollar is experiencing an upward trend, buoyed by shifting rate expectations and positive US economic data. This trend highlights a flight to quality, with investors gravitating towards the perceived safety of the US dollar in uncertain times.

Understanding these interconnections between inflation rates, energy sector dynamics, stock market performance, and currency trends is paramount for investors navigating the ongoing economic uncertainty. These factors collectively influence the financial landscape, underscoring the importance of closely monitoring economic indicators and market reactions.

How to trade US dollar

  1. Open an account to get started, or practice on a demo account
  2. Choose your forex trading platform
  3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.

Reviewed by:
Glen Frybarger
Senior Content Strategist, Chicago

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